I don't quite understand how anyone would invest in VXX (asides from short-term trades)... Since the VIX term structure is generally in contango, the VXX is doomed to bleed to death.

Therefore, how exactly does this type of structure work (ETN)? Eventually, the capital raised by selling these notes will run out - what happens then? They have already reverse splitted the VXX, what's next? Who is investing in it in the first place?

1 Answer
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Generally, one holds VXX (or VXZ) for the same reasons one holds any long-volatility position, either (a) as a directional bet on volatility or (b) as a hedge to large directional moves or implicit short volatility positions. Obviously the former reason is often shorter-term.

In the second case, it's relatively easy to see that, say, an equity portfolio of leveraged companies will get creamed in precisely the same circumstances that VXX will spike. In effect, the dividends or appreciation of those stocks will pay for the bleeding of the VXX position. The same is even more evidently true of positions belonging to the subset of options traders whose personal style often puts them in short volatility (short gamma) positions. In these cases VXX provides something of a fire-and-forget hedge that does not need constant rolls, as an option or VIX futures position might.

Essentially all long-volatility positions tend to "bleed" value from day to day, at least on those days when nothing "interesting" happens. Options traders call this the theta bill.

With respect to the mechanics, Barclay's has the right to redeem the notes. The capital won't run all the way out, but may get so low that they decide to redeem and reissue. I would be willing to bet that, if they do so, they will work out a way to keep the stock symbol unaltered.